IMF Upgrades China's Growth Forecasts – Reactions

Amanda Cheesley Deputy Editor 9 November 2023

IMF Upgrades China's Growth Forecasts – Reactions

After the International Monetary Fund (IMF) upgraded China’s growth forecasts this week, investment managers discuss the outlook for the country and investment opportunities.

Despite concerns about China’s slowing economy, and its real estate sector in particular, the International Monetary Fund (IMF) upgraded China’s growth forecasts this week, predicting that it will grow 5.4 per cent this year.

The revision came after China approved a $137 billion sovereign bond issue and allowed local governments to frontload part of their 2024 bond quotas, in order to support the economy. The country has also introduced various measures to support the property market, although more remains to be done.

The IMF said that continued weakness in the property sector and subdued external demand could restrict gross domestic product growth to 4.6 per cent in 2024.

“A GDP forecast of 5.4 per cent for the year compared to the previous IMF forecast of 5 per cent is a marginal positive and gives further confidence that China’s muted post-Covid recovery will continue. It does little to change our overall exposure, however. We also agree with the issues highlighted by the IMF concerning property developers and local government debt, but we are not directly exposed to those areas within the Somerset Asia & Emerging Market Dividend Growth Strategies," Mark Williams, co-manager of the Emerging Markets Dividend Growth Strategy and Asia Income Strategy at Somerset Capital Management, said when reacting to the news on Wednesday.

“China remains the largest exposure within the Somerset Asia & Emerging Market Dividend Growth portfolios and we emphasise that this is not a market view, but a reflection that the recent negative sentiment, both geopolitical and domestic, has thrown up significant opportunities at a company level. Our exposure is to a broad group of well-managed businesses with the levels of growth that we seek but at far lower valuations than other countries can offer,” Williams added.

Meanwhile, UBS Global Wealth Management said on Wednesday that the Chinese property sector remains under distress, with contract sales for the top 100 developers declining around 41 per cent year-over-year in October. “Another round of official statements of support suggest renewed efforts to boost creditor sentiment, and indeed higher quality name bonds rallied on the news, though this did not extend to more distressed names suggesting scepticism remains entrenched,” UBS said in a note. Within Chinese equities, UBS holds a neutral rating on developers. Instead, it prefers a growth-tilted barbell strategy that balances both recovery beneficiaries such as the consumer, internet, and materials and industrials sectors, alongside high-yielding stocks in defensive sectors including utilities, insurers, and banks. 

Swiss private bank Julius Baer also highlighted how Chinese exports declined more strongly than expected, pointing to ongoing economic headwinds from soft global demand. “At the same time, import growth surprisingly turned positive in October. This may reflect a potential stabilisation of domestic demand on the back of increased policy support, although further evidence is needed,” the private bank said in a note.

Julius Baer maintains its view that the Chinese economy is not yet out of the doldrums: “The persisting issues in the housing sector, low consumer and business confidence, as well as soft global demand for Chinese exports could lead to moderating growth in the fourth quarter of 2023 after a strong third quarter.” It keeps its growth forecasts of 5.2 per cent for 2023 and 4.4 per cent for 2024.

Nevertheless, Williams thinks firms are still undervalued in emerging markets, compared with countries such as the US where valuations are high, and there is a huge pool of companies in China which offer attractive investment opportunities. His views have been echoed by Ronald Chan, founder and CIO of Chartwell Capital an investment firm based in Hong Kong, who thinks that there are hidden gems to be found in the country. See more here.

Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT) and senior managing director at US-based investment manager Franklin Templeton, also believes that there are some good firms to be found there. See more here.

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